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Market has you on edge? Do what Warren Buffett does

It usually makes sense to sit tight

The markets caught a bout of volatility in the last two weeks. A sudden downdraft led to breathless headlines of impending doom followed by a bounce back.

Overall, stocks have been on a long bull run since the U.S. market bottomed in 2009. But the aging bull market comes with lofty valuations that were rarely seen in the past. It’s enough to inspire a case of the willies.

Every seasoned investor knows that, just as night follows day, stocks will eventually stumble. Market corrections are relatively common and occur when the market falls more than 10% from its prior peak. Bear markets are a little less common but are likely to occur many times in an investor’s lifetime. They are marked by declines of more than 20%. Even larger market downturns, say of the 50% variety, are fairly rare but they happen.

Despite the poor periods, the stock market has been good to investors who slowly bought in during their working years and then slowly sold in retirement. A sudden market surge, or collapse, in any given day, month, or year shouldn’t change the overall picture much.

Instead, most investors should develop a realistic investment plan and carefully consider the market downturns (and upswings) that are likely to occur. The difficult part is to follow the plan through several market cycles. It’s easy to do when the market provides a nice tailwind but much harder when headwinds blow.

Nonetheless, the vast majority of investors should avoid market timing and follow the lead of Warren Buffett and Charlie Munger instead. Broadly speaking, they buy companies at reasonable prices and hold them for very long periods. They’re like collectors but instead of baseball cards they buy good businesses and rarely sell. It’s a simple approach that has worked well for decades.

You’ll notice that Warren and Charlie don’t try to get out at the first sign of a possible market retreat with a view to getting back in at the bottom. They don’t play that game. It’s a game they don’t think they can win; and if they can’t do it, then most people shouldn’t even try.

But, given their track record, it also means that you can be a highly successful investor without having to be an active market timer. Just buy right and sit tight.

The Climbing Canadian CATS

The Climbing CATS strategy is based on a momentum plus value combination. It starts with reasonably-sized Canadian firms and then focuses in on value stocks. Call them Cheap And Thrifty Stocks, or CATS, if you will. But it also looks for firms with strong relative momentum that have climbed higher in recent times.

More specifically, when it comes to size we start with a list of about 200 of the largest stocks that trade on the TSX. We then narrow down the search to stocks that have low-to-moderate price-to-earnings ratios. Finally, we pick stocks that have fared the best over the last 12 months.

The current list of Climbing CATS is shown in the table below. It represents a starting point for those who want to put some money to work and is best suited for more aggressive and experienced investors. Investors should aim to hold the CATS for a year.

Climbing Canadian CATS

Name

Price

P/E

Total Return

Transat AT (TRZ)

$10.60

2.95

104%

Canfor (CFP)

$28.29

14.81

100%

West Fraser Timber (WFT)

$83.25

13.46

86%

Air Canada (AC)

$23.15

3.44

70%

Martinrea (MRE)

$13.61

7.44

64%

Western Forest (WEF)

$2.72

11.77

50%

Norbord (OSB)

$46.44

7.16

42%

Canfor Pulp (CFX)

$14.06

13.92

37%

Chorus Aviation (CHR)

$8.90

7.14

33%

Cascades (CAS)

$15.54

2.91

27%

Source: Bloomberg, February 5, 2018

Notes: Price: Closing price per share; P/E: Price to earnings ratio; Total Return: The total return generated by the stock over the last year.

As always, do your own due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)

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